Financial Crisis

[midas]

EU investigates Greek-style budget fraud in Bulgaria | EurActiv Edited June 11, 2010 by midas

[12DrinkMore]

Article continued here...

FOFOA

Oh no! It's another of those panic mode buy gold yesterday, the USD is about to become worthless overnight, hyperinflation will strike TONIGHT whilst you are asleep and tomorrow a loaf of bread will cost 6 trillion Dollars and an ounce of heavy yellow metal will cost a pile of Greenbacks which would require supplemental oxygen to count and cause a major hazard to international flights.

But nowhere do I see a mechanism that would create hyperinflation. In countries where it has occurred there has been huge external debt in foreign currencies, with nobody wanting to hold the sovereign currency. This is what would be interesting if, for example, there was a decision to put Greece back onto the Drachma. Something which is, IMO, not easy. There is a bit of banter about it, but, in the second it looks serious, there would not be a single Euro left in the banks, because everyone would know that a return to the Drachma would mean a currency devaluation and inflation in terms of Drachmas. The Greeks would have to introduce strict price and currency controls to prevent prices racing upwards.

But back to the USD. Unless Bernanke does something incredible, like dropping a million into everybody's bank account, the Austerity Challenge 2010 seems to be taking hold. Debt is being paid off, cut backs are being made, and new productive jobs are not being created. All this means that there is less cash being spent on stuff and is more deflationary than hyperinflationary. The hyperinflationists seem to base their argument on the huge amount of QE, which they assume will, at some point tonight, find its way into the average Joe's pocket and all the Joe's and Jane's will collectively go out on a spending binge. But I believe most of that QE has been spent buying up Tim's UST's, which are propping up the banks' balance sheets, so it can't be relent anyway, leaving Ben with a load of rubbish on his balance sheet, which presumably he will want to sell of at some point, and that is also a chunk of deflation in the background, although I expect Ben will pick the moment and sell into any signs of another bubble, effectively subduing it, another reason why I can't see hyperinflation coming along tonight.

Now who is going to be interested in taking the USD down? I would have thought that just about everybody in Asia is happy to preserve the pegs, with the odd 1 or 2% corrections such as Singapore did a few weeks ago. It makes things nice and stable. Although Tim is also getting a bit more agitated about the Yuan, as I doubt whether the Chinese will make any change in their policy over the next couple of months, I wonder if the US will indeed bring up the trade barriers in September? But, to be honest, the reason given that the Chinese, and presumably the rest of Asia, are causing unemployment in the States implies that the States wants to and is able to compete directly with Chinese manufacturers. Come on Tim, stop looking for the bogeyman, enjoy the cheap imports, which are sold with large margins in the States, which in turn pays for salaries, and develop industries which are not directly competitive with Asia.

Hmm, might be difficult, though. Western countries have legislated entrepreneurs and massive investments out of existence. (sorry, off on another ramble here, but compare Thailand and the UK. In Thailand a Thai can open up a small restaurant, start selling alchohol and fags with almost no hassle. In the UK you need planning permission, have health inspectors, tax inspectors, labour laws, work place inspectors breathing down your neck before you have even opened up; why bother even trying? Might as well just collect the dole, sit back and watch the World Fartball)

So does Tim really care about the vast quantity of UST's out in the world? Possibly not, the Euro has taken a knock, and the GBP is not being supported by even the UK financial institutions, which have moved heavily into UST's over the last two years (ref my post of a couple of weeks ago). Surely the USD hegemony has been strengthened through this debt driven mess, and Tim will continue to finance his deficits through UST sales because, in the words of Clinton, "he can", and there is no alternative place for all the cash sloshing around the world's banking system.

Well, that is probably a load of rubbish again, but it reminds me, I must go and get some beer in this afternoon, and then pop into the gold shop and make the GF very happy. Just in case the Raving Hyperinflationists have got it right, you never know, it might be TONIGHT, Sleep well...

[12DrinkMore]

3. Bank loans are a part of the liquidity creation process - banks' liabilities that are a multiple of their assets (or as you say whose reserves are a fraction of their loans) are creating liquidity almost from thin air. That is as true for the French and German banks who lend to GIPSIs as it is for domestic mortgage lenders etc - possibly even more so depending on the categorization of these loans - sovereign loans presumably requiring far lower capital set-aside than consumer loans in most jurisdictions.

Don't forget also that AAA sovereign debt is an acceptable balance sheet asset equivalent to cash so, for instance, a couple of years ago a pre-bankrupt GIPSI walks into a German bank that has Eur 275 Mn cash sitting in the vaults and says "I need Eur 275 Million please"..German bank transfers Eur 275 Mn cash and ends up with say Eur 25 Mn of Greek bonds and a Eur 250 Mn term loan on its balance sheet...it then funds the Eur 250 Mn through the markets and it now has that 250 Mn sitting in the vaults to repeat the process with.........One story doing the rounds is that there are German banks who now find themselves over 100X leveraged...bearing in mind their expsoures to GIPSIs and also that I don't believe that German banks have ever properly written down their exposures to US sub-prime, I'd be very nervous about any European banking expsoure right now.If things move quickly against them do we have faith that the EU could quickly rally round to save its banks the way that the Fed/Treasury did? Maybe, unlike America, Europe will be saved from itself by its own bureaucracy?

Thanks for taking the time to answer.

Overnight I have rethought this.

Now, although the fractional reserve banking effectively means that banks can create say up to a multiple of 10 times the deposit base, this does not happen in one fell bang. it is a reiterative process, the very first customer strolls into the bank and dumps 100 Baht on the counter, everybody shouts "whooppee!" and then the bank can lend out 90 Baht to customer B, who then spends it on stuff at customer C's shop. Customer C then deposits this 90 back in the bank and the bank can lend out 90% of this, ie 81 Baht, to D. And so on until the bank has lent out 1,000 Baht or 10,000 if they have been naughty.

But, what happens if the bank invests the 90 Baht deposit of customer C in a government bond? Surely that would stop the fractional reserve thingy in its tracks, because the cash has gone off to Tim, or, what's the name of that schoolboy, ahh, yes, Osborne. STOP! The light dawns and I can see this makes no difference whatsoever, because Osborne will have squandered the cash on some frivolity, such a new garden gnome for number 11, and the money heads off through the garden gnome seller back into the Magical Mystery Banking Machine, just ready to be fractionally exploded into even more debt.

Glad I cleared that up by myself.

[BlackJack]

3. Bank loans are a part of the liquidity creation process - banks' liabilities that are a multiple of their assets (or as you say whose reserves are a fraction of their loans) are creating liquidity almost from thin air. That is as true for the French and German banks who lend to GIPSIs as it is for domestic mortgage lenders etc - possibly even more so depending on the categorization of these loans - sovereign loans presumably requiring far lower capital set-aside than consumer loans in most jurisdictions.

Don't forget also that AAA sovereign debt is an acceptable balance sheet asset equivalent to cash so, for instance, a couple of years ago a pre-bankrupt GIPSI walks into a German bank that has Eur 275 Mn cash sitting in the vaults and says "I need Eur 275 Million please"..German bank transfers Eur 275 Mn cash and ends up with say Eur 25 Mn of Greek bonds and a Eur 250 Mn term loan on its balance sheet...it then funds the Eur 250 Mn through the markets and it now has that 250 Mn sitting in the vaults to repeat the process with.........One story doing the rounds is that there are German banks who now find themselves over 100X leveraged...bearing in mind their expsoures to GIPSIs and also that I don't believe that German banks have ever properly written down their exposures to US sub-prime, I'd be very nervous about any European banking expsoure right now.If things move quickly against them do we have faith that the EU could quickly rally round to save its banks the way that the Fed/Treasury did? Maybe, unlike America, Europe will be saved from itself by its own bureaucracy?

Thanks for taking the time to answer.

Overnight I have rethought this.

Now, although the fractional reserve banking effectively means that banks can create say up to a multiple of 10 times the deposit base, this does not happen in one fell bang. it is a reiterative process, the very first customer strolls into the bank and dumps 100 Baht on the counter, everybody shouts "whooppee!" and then the bank can lend out 90 Baht to customer B, who then spends it on stuff at customer C's shop. Customer C then deposits this 90 back in the bank and the bank can lend out 90% of this, ie 81 Baht, to D. And so on until the bank has lent out 1,000 Baht or 10,000 if they have been naughty.

But, what happens if the bank invests the 90 Baht deposit of customer C in a government bond? Surely that would stop the fractional reserve thingy in its tracks, because the cash has gone off to Tim, or, what's the name of that schoolboy, ahh, yes, Osborne. STOP! The light dawns and I can see this makes no difference whatsoever, because Osborne will have squandered the cash on some frivolity, such a new garden gnome for number 11, and the money heads off through the garden gnome seller back into the Magical Mystery Banking Machine, just ready to be fractionally exploded into even more debt.

Glad I cleared that up by myself.

Some how me thinks that the banks have over used fractional lending and lent out far more than their letting on = part of the problem as no one knows exactly what they are doing or have done.

Also now the BS bankers are not being believed by other BS bankers and so inter lending is not being done as much as before = someone has the hand brake on.

Europeans are beginning to buy whatever gold and silver they can = not ounces but grams.

If i am right it will be the mums, dads and the retirees / funds that tip the balance in Europe and they will be dumping the Euro by the bucket to buy metal.

To dump one dying currencies for another = US$ = dumber and dumber.

So whats left?

What is a safe haven ?

Gold Silver ?

oh by the way inflation is printing more and more money and so what country has printed its way into history = USA.

Will other countries follow?

A cheap way to buy into gold is through a mine that has cash and that is producing.

BTW i am not a gold bull = I am just following the herd = stampede

good luck everyone

forget the conspiracies its time to run

[churchill]

I agree Gold/Silver seem to be the logical places to invest in this market /

PONZI Finance Recipe for Economic Catastrophe, Gold Not a Bubble

PONZI Finance Recipe for Economic Catastrophe, Gold Not a Bubble :: The Market Oracle :: Financial Markets Analysis & Forecasting Free Website

And gold/silver stocks are very good value at these prices

Time-Tested Indicator Predicts Big Gains for Gold Stocks

Time-Tested Indicator Predicts Big Gains for Gold Stocks -- Seeking Alpha

[BlackJack]

time for a laugh in all the doom and gloom

http://www.brasschecktv.com/page/856.html

[12DrinkMore]

Here's something to read for all the budding economists

Economics in One Lesson | Foundation for Economic Education

Edited June 11, 2010 by 12DrinkMore

[12DrinkMore]

Well, it was good news on the jobs front in May wasn't it?

Well, maybe not

Economy adds 431K jobs but few in private sector - Yahoo! News

Virtually all the job creation in May came from the hiring of 411,000 census workers.

Well, that is a lot of highly productive workers with a long term future.

[flying]

Oh no! It's another of those panic mode buy gold yesterday, the USD is about to become worthless overnight,

I think you missed a large section of that article.

[BlackJack]

Its ok to be rational and think about your investments but the masses that are trying to protect their measly savings are walking with their savings into gold or something else. Understand that the masses generally have no idea about whats a good or bad investment and have little education in these matters.

These people are the ones that will provide the tipping point on lets say the EURO by buying grams or silver or gold instead of holding a sinking currency.

Financial advisers are one thing but when the grass roots people think they are loosing they will run into something they understand and gold has always been that safe haven for them.

I think a lower price entry point to gold would be a producing mine

Any ideas on this

[sokal]

But back to the USD. Unless Bernanke does something incredible, like dropping a million into everybody's bank account, the Austerity Challenge 2010 seems to be taking hold. Debt is being paid off, cut backs are being made, and new productive jobs are not being created. All this means that there is less cash being spent on stuff and is more deflationary than hyperinflationary. The hyperinflationists seem to base their argument on the huge amount of QE, which they assume will, at some point tonight, find its way into the average Joe's pocket and all the Joe's and Jane's will collectively go out on a spending binge. But I believe most of that QE has been spent buying up Tim's UST's, which are propping up the banks' balance sheets, so it can't be relent anyway, leaving Ben with a load of rubbish on his balance sheet, which presumably he will want to sell of at some point, and that is also a chunk of deflation in the background, although I expect Ben will pick the moment and sell into any signs of another bubble, effectively subduing it, another reason why I can't see hyperinflation coming along tonight.

So Afghanistan, Mongolia and Venezuela's central bankers did something incredible ? Like dropping a million into everybody's bank account ? which found its way to Joe and Janes pocket ? who collectively went on a spending binge ?

You have allot to learn about currencies and macro economics.

[teletiger]

"Recommend? I would recommend everybody panic."

Hugh Hendry. (2010)

Regards.

[Gambles]

Funny money has been a political tool forever,

The Romans had precious metals as their currency and do you know the term "debase"? The Roman politicians had the brilliant idea that if a coin was 100% pure precious metal, they could slip a little base metal in and, over a couple of hundred years, they went from 100% pure precious metal to almost 0%. That's where the term "debase" comes from

true....and if we're getting all etymological then there's always clip joint - where primarily gold and silver coins were trimmed and clipped. Additional tangential apparent pertinence to this disucssion stemming from the fact that if I recall correctly in 13th century England this crime was seemingly primarily practised by Jews who were initially executed in large numbers for this capital offence and then ultimately banished en masse from the Kingdom (the mediaeval Exodus) although it was widely believed at the time that this was a very convenient way for the crown to default/restructure/obtain forgiveness on its heavy indebtedness to Jewish lenders...but, of course, that was just 13th century England.....

[12DrinkMore]

So Afghanistan, Mongolia and Venezuela's central bankers did something incredible ? Like dropping a million into everybody's bank account ? which found its way to Joe and Janes pocket ? who collectively went on a spending binge ?

There are, I think, a few causes of hyperinflation, but the situation in pisspot little countries (sorry guys) is not the same as in the Great Us of A, still the world's biggest economy and still running with the World's reserve currency. And they have just done a pretty fine job of kicking the young EUR-upstart way back down the ladder.

So sticking with the US and the USD. In spite of all the talk about how the USD is doomed, it is obvious that whenever some issue pops up, money flows back into the "safety" of the USD. It is by far the most deeply liquid currency on the globe. More than enough for everybody, Tim and Ben are making sure of that, even dishing out oodles of them to the UK and Europe as they ran out a couple of times in the last year or so.

And I think it is almost always the case that in those countries with hyperinflation firstly the prices inflate rapidly in the local currency, leading to barter, gold/silver or once again, that old standby the USD as the preferred medium of exchange. And it is always the case that there is a complete lack of confidence in the local currency, so as soon as you have a Drachma in your hand you want to spend or exchange it before the Drachma has lost 10% of its value inside of two minutes. I believe it is also the case that in all these countries that experience hyperinflation the vast majority of the transactions are based on physical money transfer and not the good ol' charge card. The US runs on the charge card, if in the US if hyperinflation kicked in nobody would accept a single charge card. Only cash would be accepted, I suppose Ben would really have to dust off the physical printing press, as there is nowhere near enough Greenbacks around.

But meandering on,

Is it possible that the average Joe will lose total confidence in the Greenback and the banking system to such an extent that he will hysterically rush to withdraw all his savings (Duh! What savings?) and start buying essential stuff like burgers, tacos and bud before the price goes up 10% overnight? I can't see the average Joe losing faith in the Great US of A.

And in an economy where just about everything is cashless and runs over plastic and direct transfer (Does anybody still get paid in real paper Greenbacks anymore?) the ability of the government to subdue any panic spending and maintain price/wage controls is possibly close to 100%.

And then we have all the world's trade which is dealt with in USD's. The majority of the USD's are not even in the US. Now what sort of action would Ben have to take to destroy confidence in all the countries that use the USD to price goods? If the Chinese continue to make a widget and sell it to the States for 1 USD, then presumably the States, in its hyperinflation mode, will be very happy, nay, totally ecstatic, to pay the 1 USD for the widget, which sort of keeps the hyperinflation story away.

However, if I turn my sights to Europe and the UK, well, yep, here it is a totally different story. The UK imports a load of stuff just to to keep itself ticking over, now, what happens if the exporters say, "Sorry guys, we are not interested in these tedious Quids anymore, they just ain't worth squit to us, give us Greenbacks or Gold". Well, then the shit hits the fan, because the UK just don't have no Greenbacks. Except that the financial institutions have been buying up far more UST's than any other country by far over the las two years. Maybe they know something?

Well, I wonder if that makes any sense, or is just another load of drivel from the dark recesses of my over active brain.

You have allot to learn about currencies and macro economics.

I absolutely agree. That is why I find it all so interesting.

[lannarebirth]

Interesting video, though I'm guessing 12 is going to like its message even less than I did. Luckily, he's got that Chang thing going on.

Edited June 12, 2010 by lannarebirth

[12DrinkMore]

Interesting video, though I'm guessing 12 is going to like its message even less than I did. Luckily, he's got that Chang thing going on.

Thanks, that consumed 50 odd minutes of my time enjoyably and a beer as well, so even better.

What struck me was the array of Asian students forking out USD 60K for a quant education. They all looked totally bored, so either they completely understood what he was going on about, or they had no frigging clue, way over their heads. But in either case stand by for the Asian financial crisis Mark II, because presumably these guys will somehow get qualified and head back to Asia and inflict the same financial terrorism those Western guys inflicted on the West.

Never did like oysters or indeed understand why people want to chuck a living piece of rubber down their throats leaving a nasty salty taste behind.

Must try out the 100 bottle theory and try to get 20% discount off the local beer supplier. Based on previous experience he will remain as inflexible as ever.

[sokal]

US is bThere are, I think, a few causes of hyperinflation, but the situation in pisspot little countries (sorry guys) is not the same as in the Great Us of A, still the world's biggest economy and still running with the World's reserve currency. And they have just done a pretty fine job of kicking the young EUR-upstart way back down the ladder.

So sticking with the US and the USD. In spite of all the talk about how the USD is doomed, it is obvious that whenever some issue pops up, money flows back into the "safety" of the USD. It is by far the most deeply liquid currency on the globe. More than enough for everybody, Tim and Ben are making sure of that, even dishing out oodles of them to the UK and Europe as they ran out a couple of times in the last year or so.

Those are not even cases of hyperinflation, just high inflation. The Euro zone is a bigger economy then the US and it also holds more gold then the US. The Eurozone is also China's biggest trading partner. Everyone thinks the US is but that is not true.

The first stage for hyperinflation (currency collapse) is a shortage of the said currency. You are making the case for hyperinflation (currency collapse) without even realizing it. Like you just pointed out, we have a shortage of the said currency.

And I think it is almost always the case that in those countries with hyperinflation firstly the prices inflate rapidly in the local currency, leading to barter, gold/silver or once again, that old standby the USD as the preferred medium of exchange. And it is always the case that there is a complete lack of confidence in the local currency, so as soon as you have a Drachma in your hand you want to spend or exchange it before the Drachma has lost 10% of its value inside of two minutes. I believe it is also the case that in all these countries that experience hyperinflation the vast majority of the transactions are based on physical money transfer and not the good ol' charge card. The US runs on the charge card, if in the US if hyperinflation kicked in nobody would accept a single charge card. Only cash would be accepted, I suppose Ben would really have to dust off the physical printing press, as there is nowhere near enough Greenbacks around.

The US was the biggest export creditor nation with the biggest gold hoard ever, that is why it has had a good reputation and that is why the USD was the old standby preferred medium of exchange.

Is it possible that the average Joe will lose total confidence in the Greenback and the banking system to such an extent that he will hysterically rush to withdraw all his savings (Duh! What savings?) and start buying essential stuff like burgers, tacos and bud before the price goes up 10% overnight? I can't see the average Joe losing faith in the Great US of A.

And in an economy where just about everything is cashless and runs over plastic and direct transfer (Does anybody still get paid in real paper Greenbacks anymore?) the ability of the government to subdue any panic spending and maintain price/wage controls is possibly close to 100%.

There is enough USD around the world that it will only take one central bank who holds lots of USD forex reserves to crash the currency. Remember, the first person out profits the most. Vladamir Putin comes to mind...

And then we have all the world's trade which is dealt with in USD's. The majority of the USD's are not even in the US. Now what sort of action would Ben have to take to destroy confidence in all the countries that use the USD to price goods? If the Chinese continue to make a widget and sell it to the States for 1 USD, then presumably the States, in its hyperinflation mode, will be very happy, nay, totally ecstatic, to pay the 1 USD for the widget, which sort of keeps the hyperinflation story away.

However, if I turn my sights to Europe and the UK, well, yep, here it is a totally different story. The UK imports a load of stuff just to to keep itself ticking over, now, what happens if the exporters say, "Sorry guys, we are not interested in these tedious Quids anymore, they just ain't worth squit to us, give us Greenbacks or Gold". Well, then the shit hits the fan, because the UK just don't have no Greenbacks. Except that the financial institutions have been buying up far more UST's than any other country by far over the las two years. Maybe they know something?

When the US was the biggest export nation in the world it was never interested in tedious fiat, they only accepted gold. That is why at one point the US had 20,000 tons of it.

There is only a finite amount of purchasing power within an economy. When all of that purchasing power is spent, the value of the remaining paper out there is worth less and less. Even if you don't print anymore new currency. That is why basket case economies have high inflation.

[Gambles]

Funny money has been a political tool forever,

The Romans had precious metals as their currency and do you know the term "debase"? The Roman politicians had the brilliant idea that if a coin was 100% pure precious metal, they could slip a little base metal in and, over a couple of hundred years, they went from 100% pure precious metal to almost 0%. That's where the term "debase" comes from

Having said that some think gold is the solution.

Quotes, Investors and speculators have good reasons to turn to gold in the midst of unorthodox monetary policies and high fiscal deficits. As long as low interest rates and high volatility persist, the markets will expect the curse of inflation - and the continuing high gold price is the sure result. - Hossein Askari and Noureddine Krichene The world's economic expansion since Franklin D Roosevelt took the United States off gold in 1933 does not make it impossible for the world - or an individual country - to return to the gold standard. Just as honesty is practicable and constitutions should be followed, a return to the gold standard is both possible and necessary. - Antal E Fekete

Iwould like to note that the Thai seem to understand the value of gold better than most.

nice quotes but utter tosh really; fiscal indiscipline is the problem (since the start of the last century, by 1933 the gold standard was already dead and buried in most major economies) - I don't think that anyone has proposed a viable or serious modern gold-based solution to the problem. In terms of global monetary policy, it's a relic of a former age. That said its role as a store of value at an individual level is currently reemergent which is why we'd see gold running to at least $ 2000 per oz but a return to the gold standard is both impossible and a distraction from the need to create a modern solution to the economic problems that the indiscipline has caused and which still lie not very deep beneath the surface...

[Gambles]

I have always had obsession with demographics and economies - in that I think that demographics essentially explain at least 50% of economic activity over the medium term. For instance Japan's two decades of lost growth is most easily explained by demographics.

There is a good blog about this.

Super-Economy: Japan's problem is supply, not demand (updated)

By a swedish blogster.

The salient points being....

The importance of the demographic transformation in Japan is even more clear if we include the entire 1990-2007 period.

In non-population adjusted figures, Japan's real GDP grew by 26% in total these years, the lowest in the OECD. In comparison the figures are 63% for the U.S and 44% for the EU.15.

But during this period the U.S saw it's potential labor force (the number of people between 15-65) increase by 23% and the EU.15 by 11%, while Japan had a decrease of 4%.

Between 1990-2007, GDP per working age adult increased by 31.8% in the United States, by 29.6% in EU.15 and by 31.0% in Japan. The figures are nearly identical!

Japan has simply not been growing slower than other advanced countries once we adjust for demographic change.

Actually the EU growth rate is understated in his figures because the inclusion of Germany (whereby the inclusion of E.Germany ranks it so low is something of an aberration.)

Anyway the point is this. Europe and the USA are going Japanese in demographic terms. And when I say 'going Japanese', I mean going Japanese squared in a lot of cases. In other words, Japan's economy has done fine but it has seemed a nightmare because the working population actually fell - by 4% - over 18 years.

Then you can do some back of the fag packed projections going forward and estimate that...

To the year 2050 on an optimistic scenario...

Europe's real growth rate will be 0.5% p.a.

And the USA's growth rate will average 1.7% p.a.

I call this optimistic because I assume the same real per annum GDP growth rate of the last 20 years per worker (namely 30%) combined with the UN demographic stats. Japan's economy has not been great with a 4% decline in working population - you cant expect much out of Europe with a 25% decline.

And the reason this is optimistic is there has been an enormous increase in leverage across the board over the last 20 years which is essentially spending today what you earn tomorrow. What would have been the US or UK's growth rate without the stimulus, how much has growth in the short term been boosted by mortgage equity withdrawals and the decline in savings rates.

I doubt economies will deleverage but they simply cant get a huge boost from increasing leverage. So throwing away the fag packet as being too sophisticated and simply making the assumption that increased leverage boosted growth by about 1.2% p.a. between 1990-2010 I can assume zero real growth per worker going forward and come up with a pessimistic forecast that...

EU growth will average -0.6% real over the next 40 years

While the US will grow real at about 0.4% p.a.

And in reality things could turn out worse. You see you can essentially increase debt forever without increasing leverage, so long as you assume growth in 'nominal' GDP. But it is a non-linear reality if growth is lower, your ability to accumulate debt is lower or negative which reduces your GDP. For instance the EU's 3% deficit limit is based on a growth assumption.

Demographics is both extremely important and also very misunderstood (at least by me) - but big picture trends tend to be unopposable

Shame that you missed Scott Campbell's recent Bangkok visit - he picked up the demographic theme -

Unfortunately I'm not very good at uploading graphics but basically US population from 1960-2020 (depicted at 20 year intervals) is from baby boom to elderly population

whereas Asia (depicted by India 2000/2025/2050) is poised to experience its own baby boom - yet another confirmation that this is Asia's century!

[Gambles]

Oh no! It's another of those panic mode buy gold yesterday, the USD is about to become worthless overnight, hyperinflation will strike TONIGHT whilst you are asleep and tomorrow a loaf of bread will cost 6 trillion Dollars and an ounce of heavy yellow metal will cost a pile of Greenbacks which would require supplemental oxygen to count and cause a major hazard to international flights.

LOL - I think I've published more than a few of those myself!

But nowhere do I see a mechanism that would create hyperinflation. In countries where it has occurred there has been huge external debt in foreign currencies, with nobody wanting to hold the sovereign currency. This is what would be interesting if, for example, there was a decision to put Greece back onto the Drachma. Something which is, IMO, not easy. There is a bit of banter about it, but, in the second it looks serious, there would not be a single Euro left in the banks, because everyone would know that a return to the Drachma would mean a currency devaluation and inflation in terms of Drachmas. The Greeks would have to introduce strict price and currency controls to prevent prices racing upwards.

But back to the USD. Unless Bernanke does something incredible, like dropping a million into everybody's bank account, the Austerity Challenge 2010 seems to be taking hold. Debt is being paid off, cut backs are being made, and new productive jobs are not being created. All this means that there is less cash being spent on stuff and is more deflationary than hyperinflationary. The hyperinflationists seem to base their argument on the huge amount of QE, which they assume will, at some point tonight, find its way into the average Joe's pocket and all the Joe's and Jane's will collectively go out on a spending binge. But I believe most of that QE has been spent buying up Tim's UST's, which are propping up the banks' balance sheets, so it can't be relent anyway, leaving Ben with a load of rubbish on his balance sheet, which presumably he will want to sell of at some point, and that is also a chunk of deflation in the background, although I expect Ben will pick the moment and sell into any signs of another bubble, effectively subduing it, another reason why I can't see hyperinflation coming along tonight.

Spot on - for now

The Feds have clearly stated that they believe that they can control the flow of money - if they're right then we would have a period of re-adjustment with a long period of sustained but moderately high inflation to inflate away the debt burden.

I just don't think that things are so easy. The deflationary pressures are huge in the indebted western economies right now (although inflation is emerging in the surplus economies and Western deflation doesn't export to the East nearly as readily as Chinese deflation did to the west) and the problem is that there is so much of a reality gap on western balance sheets that controlling this is nigh on impossible - it's like a downpour on a parched field - the water just gets soaked up but eventually the field starts to flood. If the rain keeps coming then every extra drop that falls after that point is just pure floodwater. Do we trust the Feds and The Treasury to get it right? I don't.

At some point brutal deflation could quickly switch to hyperinflation but you're right - it won't be tonight and it's a 'could be' not a definite.

[Gambles]

Now, although the fractional reserve banking effectively means that banks can create say up to a multiple of 10 times the deposit base, this does not happen in one fell bang. it is a reiterative process, the very first customer strolls into the bank and dumps 100 Baht on the counter, everybody shouts "whooppee!" and then the bank can lend out 90 Baht to customer B, who then spends it on stuff at customer C's shop. Customer C then deposits this 90 back in the bank and the bank can lend out 90% of this, ie 81 Baht, to D. And so on until the bank has lent out 1,000 Baht or 10,000 if they have been naughty.

But, what happens if the bank invests the 90 Baht deposit of customer C in a government bond? Surely that would stop the fractional reserve thingy in its tracks, because the cash has gone off to Tim, or, what's the name of that schoolboy, ahh, yes, Osborne. STOP! The light dawns and I can see this makes no difference whatsoever, because Osborne will have squandered the cash on some frivolity, such a new garden gnome for number 11, and the money heads off through the garden gnome seller back into the Magical Mystery Banking Machine, just ready to be fractionally exploded into even more debt.

Glad I cleared that up by myself.

Well done, one, two!

However, lending money via any triple A mechanism doesn't really count as lending money in a fractional reserve sense because the asset is such strong collateral that it doesn't require reserves, be it Greek, or Spanish debt (until recently), sub-prime mortgages, or anything else sliced, diced and lucky enough to receive the highest rating from the agencies

Edited June 13, 2010 by Gambles

[BlackJack]

Interesting video, though I'm guessing 12 is going to like its message even less than I did. Luckily, he's got that Chang thing going on.

Thanks, that consumed 50 odd minutes of my time enjoyably and a beer as well, so even better.

What struck me was the array of Asian students forking out USD 60K for a quant education. They all looked totally bored, so either they completely understood what he was going on about, or they had no frigging clue, way over their heads. But in either case stand by for the Asian financial crisis Mark II, because presumably these guys will somehow get qualified and head back to Asia and inflict the same financial terrorism those Western guys inflicted on the West.

Never did like oysters or indeed understand why people want to chuck a living piece of rubber down their throats leaving a nasty salty taste behind.

Must try out the 100 bottle theory and try to get 20% discount off the local beer supplier. Based on previous experience he will remain as inflexible as ever.

I agree and interesting video

its a bit like terminator 3 where the machines take over

except this could be accounting 3 where the quants take over

scary to think that in a few hours the whole financial system can melt down on automatic

[12DrinkMore]

Few interesting numbers from Willy Hutton

The banks have refused to mend their ways. Beware the next crash | Will Hutton | Comment is free | The Observer

The value of outstanding lending by British banks in all currencies is five times our national output – proportionally greater than any comparable country – and is underpinned by a puny amount of pure equity capital; £1 for every £50 lent. As an internal Bank of England working paper hypothesises, this collective balance sheet structure is so precarious that without substantial and far-reaching reform a second crisis is almost inevitable within 10-25 years. And next time we would be overwhelmed as a country.

As I can't see any "substantial and far-reaching reform" being accepted by the banks, we'd better drop our trousers now and get it over with quickly, it'll save time when we get the BBB rating stuffed up us, the Big Banking Boner.

As worrying is the lack of reform to the business model of banking built up over the last 10 or 15 years. Barclays, RBS and HSBC each boasts more than 1,000 subsidiaries – most of which are secret vehicles created to warehouse lending or direct financial flows in artificial ways, whose purpose, as one official told me off the record, is essentially deception – to avoid tax or regulation or whose complexity is designed so that in an emergency all a government can do is write a blank bail-out cheque.

And in case you are curious as to the shape and colour just before you get rated, well if you glance behind you'll be disappointed at the lack of clarity; its horribly amorphous and opaque, bit scary that, so keep your eyes facing forward and widen the stance, it's BIG.

Only 3% of cumulative net lending in the decade up to the crash went to manufacturing; three quarters went to commercial real estate and residential mortgages

Anybody still reckon that there is a manufacturing industry in the UK? The banks obviously don't, having invested 25 times more money in non-productive real estate, pushing up prices 400% in a decade. I wonder how things would have turned out if 75% of lending had gone into industry. Oh well, too late now, All that is left to hope for is when the bricks and mortar get inserted, the roof rather than basement goes in first.

[12DrinkMore]

I agree and interesting video

its a bit like terminator 3 where the machines take over

except this could be accounting 3 where the quants take over

scary to think that in a few hours the whole financial system can melt down on automatic

I don't hold the quants responsible. All they do is make a mathematical model of a very complex problem. As the guy said, once the model has been made, the end users, the Management and Decision Makers, play around with the Input Parameters until the Output Bonus says, "whoopee! YES, another 3,000,000,000,000 USD bonus!". Now, whether the input parameters are realistic is immaterial, what is material is that the Output Bonus is more than last year.

Once that Big Decision has been made, presumably they then sit in front of the 100 inch hi-def LCD monitor, get a box of chamois leather wipes out, display their total assets on the screen as follows

Hi Big Boy, today you are worth

835,345,189,884,199,881.34

and have one enormous wank.

As that sort of money can never be spent or even physically held, presumably it gives them a hard on just to look at the numbers on the screen.

[sokal]

But nowhere do I see a mechanism that would create hyperinflation. In countries where it has occurred there has been huge external debt in foreign currencies, with nobody wanting to hold the sovereign currency. This is what would be interesting if, for example, there was a decision to put Greece back onto the Drachma. Something which is, IMO, not easy. There is a bit of banter about it, but, in the second it looks serious, there would not be a single Euro left in the banks, because everyone would know that a return to the Drachma would mean a currency devaluation and inflation in terms of Drachmas. The Greeks would have to introduce strict price and currency controls to prevent prices racing upwards.

But back to the USD. Unless Bernanke does something incredible, like dropping a million into everybody's bank account, the Austerity Challenge 2010 seems to be taking hold. Debt is being paid off, cut backs are being made, and new productive jobs are not being created. All this means that there is less cash being spent on stuff and is more deflationary than hyperinflationary. The hyperinflationists seem to base their argument on the huge amount of QE, which they assume will, at some point tonight, find its way into the average Joe's pocket and all the Joe's and Jane's will collectively go out on a spending binge. But I believe most of that QE has been spent buying up Tim's UST's, which are propping up the banks' balance sheets, so it can't be relent anyway, leaving Ben with a load of rubbish on his balance sheet, which presumably he will want to sell of at some point, and that is also a chunk of deflation in the background, although I expect Ben will pick the moment and sell into any signs of another bubble, effectively subduing it, another reason why I can't see hyperinflation coming along tonight.

Spot on - for now

He is about as spot on as the people that where spot on in 2007 by being fully invested in Bear Sterns and Lehman Bros while owning a few condo's is Florida. Everything is fine until it blows up.

[12DrinkMore]

The first stage for hyperinflation (currency collapse) is a shortage of the said currency. You are making the case for hyperinflation (currency collapse) without even realizing it. Like you just pointed out, we have a shortage of the said currency.

I am missing a major paradigm change.

If there is a shortage of currency, then surely prices will fall as there will no currency able to chase stuff to buy?

Although Ben has issued zillions of eUSD's,

a. very few have found their way into the pockets of Joe Public.

b. Joe's expectations have been set to "Deflation" and "Austerity" mode, hence he is paying down debt and not buying more stuff on credit.

So I still do not see where we are going to get a huge dose of inflation tonight.

[12DrinkMore]

He is about as spot on as the people that where spot on in 2007 by being fully invested in Bear Sterns and Lehman Bros while owning a few condo's is Florida. Everything is fine until it blows up.

I would modestly claim to different.

Those guys had a blind faith in the system, that real estate would continuously rise and that Sterns and Lehman were not a bunch of fraudsters.

I have no blind faith in anything except that eight bottles of Chang would incapacitate me for a week. All I am trying to do is to try and make sense of the data we are bombarded with everyday, coupled with all the shouting and raving of the Doomsday lot.

And the most most plausible future for tonight, IMO, is that

1. Ben's anathema deflation is going to continue relentlessly

2. Asia will prosper and the standard of living will rise

3. The West will continue to see a decline in prosperity

4. Goldman Sachs will award themselves even bigger bonuses

5. I will be drinking beer

[12DrinkMore]

Hey Up!

We have a new contender for the World's currency.......

Yes...

....the Wocu is here

Wocu - Wocu.com, The Wocu is a Flexible Stable World Currency Basket which is Less Volatile

[Abrak]

I am rather surprised that this hasnt already been posted.

http://af.reuters.com/article/worldNews/idAFTRE65A0RX20100611

The 1) Errr... we might default combined with so 2) we have decided to join the austerity challenge seems quite interesting.

I know virtually next to nothing about Japan but it does strike one as odd that they should have the largest public sector/GDP number combined with the lowest 10 year interest rates.

Clearly it does have it positives...

1) a C/A surplus but that has all but disappeared.

2) A sort of reverse currency mismatch in their banking system

3) Large dollar reserves

But ...

1) Long term fundamentals are horrible

2) It seems a bit odd to me that a country with so many dollar assets keeps on opening swap windows with the Fed

3) There is a possibility that there is a 'Midas' assumption that could prove correct, that while things look bad they might be even worse.

Sometimes economies have what is called 'Coyote' moments. It just looks like a candidate.

Or simply to sum up....

Can a rational investor justify buy 10 year Jbonds at 1.3% yield, and if so, why?

Edited June 13, 2010 by Abrak

[churchill]

I think attention is going to switch to the $us VERY soon - Euro UP ? USD down ?

OR Euro down USD down Gold UP

Unbelievable !

NY State Shell Game - Municipalities Borrow from Pension Fund to make Required Pension Fund Contributions

Mish's Global Economic Trend Analysis: NY State Shell Game - Municipalities Borrow from Pension Fund to make Required Pension Fund Contributions