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Guest post: Marc Faber says “I am 100% sure that the U.S. will go into hyperinflation”

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Submitted by Edward Harrison of the site Credit Writedowns.

You have to hand it to Marc Faber; he knows how to grab your attention. Earlier this year, I posted a video of him saying “don’t underestimate the power of printing money“, a quote that has become mantra for me. Basically, he believes a rising tide of quantitative easing is going to buoy stock markets globally and the global economy (at least for the medium-term). This is a view I agree with and one reason I have taken a more bullish tack at Credit Writedowns.

Earlier today, I also posted a video of Faber talking about Nouriel Roubini and the pressure not to overstay a bearish call and miss the turn which I found rather interesting (Here’s a video of Roubini sounding rather bullish – for him). However, later in that same interview, Faber makes his most quotable statement yet: “I am 100% sure that the U.S. will go into hyperinflation.” That is a very bold claim.

Just last week, I made similar comments in my post, “More thoughts on the fake recovery.”

In my view, the Federal Reserve has effectively demonstrated it is willing to risk hyperinflation in order to beat back the deflationary forces.

But I was using hyperbole. Faber, however, is dead serious. It is the secret desire of the Fed to want inflation that has U.S. government bond yields going bezerk. But, most people are not expecting hyperinflation in the United States ever.

The video of Faber is below. Is this headline-seeking exaggeration or serious punditry?

Source

U.S. Inflation to Approach Zimbabwe Level, Faber Says – Bloomberg.com

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About Edward Harrison

I am a banking and finance specialist at the economic consultancy Global Macro Advisors. Previously, I worked at Deutsche Bank, Bain, the Corporate Executive Board and Yahoo. I have a BA in Economics from Dartmouth College and an MBA in Finance from Columbia University. As to ideology, I would call myself a libertarian realist - believer in the primacy of markets over a statist approach. However, I am no ideologue who believes that markets can solve all problems. Having lived in a lot of different places, I tend to take a global approach to economics and politics. I started my career as a diplomat in the foreign service and speak German, Dutch, Swedish, Spanish and French as well as English and can read a number of other European languages. I enjoy a good debate on these issues and I hope you enjoy my blogs. Please do sign up for the Email and RSS feeds on my blog pages. Cheers. Edward

52 comments

  1. Leo Kolivakis

    Edward,

    Faber is a god bug who has been seeing hyperinflation for a long time. It will not happen as he sees it. Read Henry Liu’s comment in my post below. The excess liquidity is likely to create a new asset bubble (commodities, oil, alternative energy?) and another meltdown.

    Guys like Faber are perma-bears who talk up their game.

    cheers,

    Leo

  2. EDC

    Faber is front running his gold trade.

    nuff said. It is doubtful we can have hyperinflaiton as long as we can issue debt denominated in USA currency.

    Once bond yields hit the TEENs, equities will be out and bonds will be favored. existing bonds will crash and tons of businesses will go bust, IMO this will lead us to deflation.

    Consumer discretionary will die in his scenario as stables will be inflated. Money can’t chase both especially since wages are to low, wages can’t go up because producers can’t pass the costs to the consumer. People are tapped.

    I enjoy faber but to me, he made a bet and is now trying to jawbone that bet…

  3. Edward Harrison

    Leo, I have to agree with you. I see hyperinflation i.e. 25+% inflation as extremely unlikely. I am interested to see what others have to say about this.

  4. Todd Wood

    I believe that we had a recent post that argued that, without leverage, wages will not soar. So, no hyper-inflation?

  5. JaReD

    Unless we see wages to rise with inflation, there is no way we get to hyper-inflation, who in their right mind will buy a $20 loaf of bread if they are only making $15 an hour?

  6. mxq

    defaulting on debt is about the most deflationary event i can think of. the fed’s balance sheet is a fraction of the wealth and liquidity that has been destroyed via house-price depreciation, bankruptcies and the virtual shutdown of the securitization markets.

    i get the point that political medling will get in the way of draining the balance sheet, but there’s a lot of stuff that will happen between now and then and simply extrapolating today’s environment into tomorrow’s inflationary scenario isn’t very rigorous. leo is right about faber’s book-talking.

  7. Edwardo

    “Just because you’re paranoid does not mean they aren’t out to get you.”

    Faber is talking his book, and yet…

    We will get a massive dollar devaluation later this year which will drive the price of food and fuel much higher and of course the raw materials that go into making our food and fuel. The trigger for this will be the realization amongst foreign bondholders that there were no green shoots sprouting this spring but rather weeds, and that the next leg down is well and truly upon us. In short, tax receipts will plummet even more and all the estimates made by government regarding our financial situation will be seen to be vastly inadequate. The fear of default and devaluation will drive us towards it. Inter alia, the governments unlawful handling of creditors will contribute to the collapse in confidence that leads to the run on the dollar.

    Another wild card or two is the geo-political scene which will act as a huge stressor going forward.

  8. Leo Kolivakis

    Edwardo wrote: “Another wild card or two is the geo-political scene which will act as a huge stressor going forward.”

    Huge wildcard…if Israel attacks Iran, all hell will break loose and gold will skyrocket above $1,000.

    cheers,

    Leo

  9. Phoevos

    Leo:

    Your characretization of Marc Faber as a gold bug is not accurate. Actually Faber says that gold will underperform since higher returns can be made in equity markets.

    I do not think he is chasing gold at the moment.

    Dean Plassaras

  10. biofuel

    > who in their right mind will buy a $20 loaf of bread if they are only making $15 an hour?

    Anyone who is hungry…

    > The trigger for this will be the realization amongst foreign bondholders that there were no green shoots sprouting this spring but rather weeds

    Bondholders don’t care about shoots of any kind. They care about the seriousness of the government to pay back the debt in kind. And the government began making noises that it is serious about taxing people. Look up today’s article in WaPo discussing a potential 10% VAT. If it passes we should call it “banking and transportation fees”, because the added tax will go to plug the hole left by “rescuing” banks, GM and Chrysler.

    With respect to new taxes, I would think it is only fair that those who had benefited from the boom the most should help plug the holes. When Bank A gave 100,000 to Joe to buy a house, Joe gave it homebuilder Q; when Joe could not pay the money back, Bank A was left with a hole, but homebuilder Q still kept its 100,000 (miuns materials and labor). In a better world top executives of Bank A and shareholders of homebuilder Q would be the first in line to cover the holes. In our world, everyone may get to cough up 10% more on everything they buy.

  11. barnaby33

    Inflation hits the elderly and those on fixed incomes hardest and they vote. Its too late to stop strong inflation in the long term, but hyper-inflation; the demographics say otherwise.

  12. Sasher

    Leo:
    If you are not a subscriber to Faber, don’t make some idiotic statements like Faber is a gold bug.

    “Sometimes it is better to be silent and be thought of as a fool, than to open your mouth and remove all doubt”.

    Faber has been 100% right and making money in every turn of the last few yrs for his subscribers like me. He has a better mkt timing sense than anybody I have read and I work at a hedge fund. So shut up and start listening instead of spouting some nonsense.

  13. Edward Harrison

    Sasher,

    Please refrain from personal attacks. If you are going to disagree, do so in a professional manner.

  14. Rolfe Winkler

    Ed:

    What about a “sudden stop” event? Isn’t that a possible scenario here?

    Investors lose faith in Treasurys and punt, hammering the dollar.

    Asset prices (anything purchased on credit) would collapse along with the US financial system.

    At the same time, the purchasing power of the dollar would get hammered relative to currencies of creditor countries.

    We go Argentina.

  15. Edward Harrison

    The guys over at Bridgewater Associates believe that Argentina is an apt comparison to the US. That holds for the UK as well. The major difference as another commenter said is that Argentina was borrowing in foreign currency whereas the U.S. borrows in dollars.

    In my view, comments from the Chinese suggest they understand that they are tied to the dollar for now and their policy options are limited. They know that a buyer’s strike would be catastrophic for the Chinese economy as well as the US and given the huge numbers of workers they need to employ and the potential fo civil unrest, I know they will not make any rash moves.

    So, the Chinese and the Americans have a situation of mutually assured destruction that limits any extreme moves.

    A bad outcome can still be the result even within that framework.

  16. Leo Kolivakis

    Sasher wrote: "Faber has been 100% right and making money in every turn of the last few yrs for his subscribers like me. He has a better mkt timing sense than anybody I have read and I work at a hedge fund. So shut up and start listening instead of spouting some nonsense."

    >>I invested in the best hedge funds in the world and NONE of them subscribed to Faber's service and if they did, it was for contrarian positioning.

    If Faber is that great, why isn't he running money of his own and stinking rich?

    He isn't an idiot and I enjoyed reading Tomorrow's Gold (yes, gold but he wasn't just talking about gold), but he falls under the perma bear camp and I have little patience for perma bulls or perma bears.

    cheers,

    Leo

  17. Sasher

    Leo: If a hedge fund is buying Faber’s service for “Contrarian Positioning” as you claim, I’d like to know their names so that I can stay away from working there. They must be idiots!
    Faber called the exact mkt bottom in March’09 through his newsletter. If you don’t believe me, scroll over to your bloomberg. He is not a perma bear as you claim. This is just a neat trick employed by people like you to stop any logical discussion about somebody’s track record. “Oh, he’s a perma bear. Oh my! shut your ears!”.

    If any hedge fund has done the “contrarian positioning” to Faber’s calls as you claim, they are out of business by now with shorting just this rally alone. I know more hedgies who were short financials at the bottom than I care to count. So don’t make any dismissive claims that you can’t support.

    All I said was that I was a subscriber and I know his calls from every month (he writes monthly).

    Your knowledge of his call was to have read his book. How many times a decade does he write a book? Any market timing advice in there? How can you even counter what I said about his timing calls with a book?
    Think before you write.

  18. frances snoot

    Leo to Frances Snoot et.all:

    “Sure it is if you are brain dead.”

    Personal attacks Aren’t professional; I agree Mr. Harrison.

    Mr. Leo: Shall we warm the crow for you, or do you prefer to eat the dish cold?

  19. Leo Kolivakis

    Sasher,

    A quick news search on marc Faber revealed the following:

    http://www.bi-me.com/main.php?id=37049&t=1&c=33&cg=4&mset=

    I quote:

    "Investment gurus Jim Rogers and Marc Faber agree on one thing. They see a major correction looming in equity markets with a currency effect for the US, since the current rally has been mostly based on printed money, a kind of 'reverse Robin Hood policy' of governments, to steal from the peasants to give to the rich."

    So Faber picked off the March 9th bottom..BIG DEAL!!!! So did most technical analysts using simple TA!

    I wrote in my blog that I saw a massive rally in Q2 but I stayed away from financials, focusing more on energy (especially solars).

    And BOTH Faber and Jim Rogers are dead wrong because this rally has more legs than they think and there will be no run on the USD.

    Finally, I doubt George Soros, Steve Cohen, Ken Griffin, Ray Dalio, John Paulson, or Jim Simons pay attention to what Mr. Faber writes every month, butif it makes you feel better, I'll track his comments more closely since he has been calling them right.

    >>frances,

    Get over it, I never called you brain dead, at least not yet.

    cheers,

    Leo

  20. Tortoise

    “Faber makes his most quotable statement yet: “I am 100% sure that the U.S. will go into hyperinflation.” That is a very bold claim.”

    Nein. Predicting anything without specifying a time frame is not bold.

    The question is whether we will see hyperinflation over the next couple of years. I will put my bet on the NO square.

  21. Leo Kolivakis

    @Tortoise:

    Don’t you love market gurus who are “100% sure”? Damn, we need more of these people on CNBC telling where to put our money!

    Ray Dalio once told me nobody can predict the future which is why all his money is invested in Bridgewater’s All Weather portfolio.

    cheers,

    Leo

  22. Justin S.

    NakedCapitalism frequently posts articles about the potential for dollar devaluation or a currency collapse. Consider Yves post from May 5th- Andy Xie: “If China loses faith the dollar will collapse”.

    I am a little bit confused why discussions about dollar devaluation or currency collapse are considered worthwhile concerns at NakedCapitalism, and yet prognostications about hyperinflation are considered jawboning that which is unworthy of consideration. I recognize they are not the same thing exact thing- and yet, is gold not a textbook hedge against either eventuality (hyperinflation or currency collapse)?

    I’d be curious to read Edward’s, Leo’s, or Yves specific opinions about the relative worthiness (or not) of gold in the current climate. I’m not a gold bug, though I do own some. Frankly, it’s been the best-performing asset in my own portfolio for several years, and for the time being I remain bullish on it, thanks in part to continued posts at NC and elsewhere about currency risks in this environment. Does anyone here entertain the possibility of massive further dollar devaluation (~15%) in the next 5 years? Or- forgive me- currency collapse?

  23. LIL

    Leo,

    You have to excuse some of these people. They are just jealous about your mad skills!

    That and there mom is telling them to get off the internet, stop browsing kittenwars and losing Guitar Hero, and do their homework.

  24. internet

    IMHO the baby boomers as a cohort will be the most deflation-inducing cohort in modern history….you’ve got a whole generation that:

    1. has seen housing prices collapse;
    2. over-”invested” in second homes, boats, etc.
    3. hold 401ks not appreciating at the magic 8% as per the actuaries/investment advisers (assuming that annual contributions matched the acturarial levels needed to sustain retirement income);
    4. see real wages stagnating; and
    5. probably will be realizing soon that as a generation they will have to work well past 55/60/65.

    then you have the children of baby boomers dealing with the wage deflation caused by constant manufacturing/clerical/higher-end white collar outsourcing to China, India, Eastern Europe, etc.

    imho.

  25. Gregory

    I always listen to Marc Faber with interest, and found him on the mark more than once. I’m having a hard time swallowing this one though, but only because with such massive unrelenting deflation underway it seems remote. Of course, I look at the FED’s balance toxic balance sheet and how it appears they won’t be able to deflate well even if they wanted to and I think, who knows. The way this weeks bonds are going, it’s looking more like they are losing control of the long rates, and that spells massive asset price loss and deflation to me over a longer time frame. But who knows.

    On another note, I must say I’m not enjoying the NK comments anymore. For example, between Leo’s strutting and LIL’s cheerleading of it, this string was positively painful to read. By singling them out I don’t mean just them, it’s several people in several threads whose comments are of such content that I find that I’m reading the comments here at NK less and less. Yves, I think you did the right thing with disabling anonymous comments, but it’s not stopped the histrionic character type from making the comments a joyless read–and I’m the guy who revels in troubling news and debate. The comments are starting to read like the histrionics you see over at MSM herd sites. Maybe some of you people have lost a lot of money and are just feeling nastier in general. And it’s certainly not just this blog (but wow what a change from a couple years ago here). It wouldn’t be so bad if some of the frail egos wasn’t so big and inflated. I welcome the deflation not only in the economy, but in human interaction.

    OK, with that said, let the flames begin.

  26. Yves Smith

    Gregory,

    I agree, and this is a no win, If I delete certain comments I get accused of censorship, even if the comments were ad hominem or just plain lame. Anything remotely political attracts libertarians, who most of the time are very strident. I’m a fan of diversity of opinion, but dogmatism, particularly the bullying closeminded sort (again, not all of them but well more than half) just sucks the oxygen out of the thread, which is the point, I suppose.

    Keep commenting, and particularly (nicely as you did) point out when a thread has degraded. Although it takes longer, high quality comments do attract more of the same.

  27. Stevie b.

    (sri – poss. dupe)

    Leo “The excess liquidity is likely to create a new asset bubble (commodities, oil, alternative energy?) and another meltdown.”

    Possibly, and if so nearly right, but maybe you missed out 1 word -bigger-, as in “…another, bigger meltdown”.

    And how long do you think the markets will allow this particular bubble to blow for anyway? Like a stale bit of gum, it wont last long and it will produce a runt of a bubble, because the markets are not just going to lie back and think of America, they’ll pop it in its infancy – just look at the bond market already, and marry that to a failing $ and buoyant gold, cos that’s what could be next on the agenda.

  28. Gregory

    Yves, I’m glad you got my meaning and I don’t mean to complain, because I appreciate and even adore the rest of the content available here. I should have said that from the outset.

    Also, I find it unfortunate; the strident approach of some libertarians. I say some because I am a libertarian, and while I will never defend the rude, I can offer the perspective that being an individualist often earns attacks from all angles and it can make one feel defensive at times. Not that this is an excuse for poor behavior but perhaps it is a reason. I always remember the advice of a wise lawyer who, educating me on the merits and tactics of defending my personal rights from abusive police once said, “Greg, being a belligerent claimant of rights does not imply being a belligerent jerk”.

  29. Independent Accountant

    I am not 100% sure I will be alive tommorrow, much less the US will experience a hyperinflation. I read a book about hyperinflations which defined them as inflations of at least 20% a month or 791% a year, compounded monthly. That said, I would not be shocked to see the US experience a 20-year long Argentinian style inflation of 20-35% annually, not a pretty prospect either.

  30. GG

    Many commentators seem to be in total denial about the possibility of hyperinflation in the USA. To my mind, this makes it an even more likely scenario. FRN’s purchasing power has already declined by 95% over the past century – how long do you think the remaining 5% will take? These processes are usually exponential in nature, so the decline should be picking up speed right about now…

  31. Phoevos

    My undestanding is that Marc Faber sees the following most likely scenario:

    1. An overdue market correction, but a mild one (meaning higher low from SPX 740).

    2. Alternatively, no meaningful correction, rather a sideways movement.

    3. After either 1 or 2 above, we rally into sometime in July for an SPX target of 1100 or so.

    4. After that we enange in a more meaninful and severe correction.

    FYI, Robert Prechter (an Elliottician with strong deflationary bias) who also advised his clients to cover shorts a week or two prior to March 6th, he has issued a recent opinion (week ago) that we will will see a very sharp correction (based on his Elliott signals).

    Therefore, both Faber (an inflationist) and Prechter (defletionist) basically agree on the final outcome. Of the two, Faber is much closer to the existing market bullish bias on the premise that fiscal stimulus will force investors into equities because of lack of investment alternatives.

  32. Dan Duncan

    The fact that this thread of comments was painful to read has little to do with strident libertarians….

    Rather, the pain stems from the ache in Sasher’s heart for his MAD LOVE of Faber and the agony it apparently caused him(?)…as he read Leo’s comments.

  33. VG Chicago

    Bring it on, baby!
    I am looking forward to paying off my debts with hyperinflated dollars. Similarly, I can hardly wait to sell my gold at $100,000 per ounce.

    Heck, future’s looking so bright here, I think I’ll rename my dog “Lucky”..LOL

    Vinny GOLDberg

    PS — how’s that for a quality comment, Yves? :)

  34. Leo Kolivakis

    Dan, Yves, Gregory,

    One of the reasons I stopped allowing comments on my blog is because I can’t spend my days monitoring them to see if someone crossed the line.

    I am not against Marc Faber, but he certainly does not have the investment wisdom that sasher claims. Nobody does, including me.

    over the years, I have read Bank Credit Analyst (I use to work there too), Ned Davis, ISI Economics, Bianco Research, GaveKal,13D etc. and you will find all their links on my blog.

    I read Faber and others too that many of you never heard of. I love reading everyone, but at the end of the day, I watch where the top hedge funds are buying and selling (go read my post on investment labyrinth) and I make up my own mind.

    After today, it’s easy to say, that’s it, the rally is over, and it very well might be over. But be careful because I think institutions are still buying the dips and this rally might surprise many of the skeptics.

    I heard there is over $4 trillion on the sidelines and many pensions have been sitting idly by, hardly buying at all.

    We shall see if this is another “sell in May and go away” or whether stocks will grind higher over the next few months.

    I do not have an a crystal ball, nobody does, but I want you to stop investing emotionally and start thinking a little outside the box.

    Finally, i apologize if I offended anyone. I might stop commenting altogether.

    cheers,

    Leo

  35. Todd Wood

    I can’t believe this gold fetish. That is all that it is.

    The new “gold” in America is community. If you are not connected to a community that is some how to the soil, you had better get there.

  36. skippy

    @Leo K,

    Mate take it from me, bullets going past ones head, distract ones thought processes, manly the emotional variety (mortality/diminishings). The real trick is to disassociate from the potential and do your job, upon completion the silence can be deafening.

    I personally enjoy all the guest posts, which I find bring added dimension to this blog, even Dan D comments. I personally enjoy the richness vs monolithic construct.

    skippy…again thank you and all the others for their personal time to educate, inform, respond to difficult issues confronting “all” of us in these interesting times.

  37. frances snoot

    Dear Mr. Leo!

    I am to step out and say, “Please forgive my strident dogmatic words!” I suppose I like to play with words, but I think it would be Criminal if Mr. Leo does not comment! His commentary this morning was brilliant. The predictions are right on. I enjoyed reading the post from the Asian Times as well, and to think about the effect of liquidity and the future asset bubble perhaps.

    Truthfully, I am quite ignorant about many things and hide behind the I and peek out.

    So please accept this strident Libertarian’s humble sorry and thank you for letting me air off.

    :} liked the oxygen metaphor

  38. Andrew Bissell

    The market calls all bluffs. Eventually Bernanke’s “credible threat” of hyperinflation will be seen for exactly what it is: a threat, and nothing more.

    Hyperinflation is the end-game for the Fed and, as Karl Denninger points out, potentially resolves itself with Bernanke swinging from a lamppost. They will never go that far, and the market will eventually figure that out and resume of process of debt deflation and liquidation.

  39. DownSouth

    The soft-spoken Melanchthon, Luther’s early disciple and fourteen years his junior, he treated like a son and prized as his superior: “he is concise, he argues, instructs. I am garrulous and rhetorical,” Luther intoned. Melanchthon, he adds, is a master of Greek and Latin; Luther’s own Latin vocabulary is insufficient and lacks elegance. And the young Humanist’s pamphlets are bitter. “I prefer to hit out like a boy,” Luther explained. This meant that the “boy” used an adult vocabulary of abuse. His antisemantic utterances are sheer vituperation. In the 16C and for a good 200 years more, insult was the accepted seasoning of intellectual debate. The solemn Milton, the sons of the Age of Reason, the aristocratic reviewers of Keats and Shelley used it freely. The mildest of Luther’s jibes was to call Dr. Eck, his chief antagonist, Dr. Geck (Dr. Goose). Yet Luther deplored the roughness of German manners and named it Grobiana, pseudo Latin from the German grob, which meanse coarse, boorish, uncouth.

    –Jackques Barzun, From Dawn to Decadence: 500 Years of Western Cultural Life

  40. frances snoot

    “An economic value is by definition a value with two faces: not only does it play the role of a constant vis-a-vis the concrete units of money, but it also itself play the role of a variable vis-a-vis a fixed quantity of merchandise which serves it as a standard. In linguistics on the other hand there is nothing that corresponds to a standard. That is why the game of chess and not economic fact remains for Saussure the most faithful image of a grammar. The scheme of language is in the last anaysis-a game- and nothing more.”

    Jaques Derrida: Of Grammatology (pg 57)

  41. joebhed

    Hyperinflation? Maybe. Give me odds.
    Hyperdeflation? Only if the Austrians win out.
    Stagflation? Could just as well be that in the extreme.
    But the call in this chat is about how to play the destruction of the economy in the current market.
    Have fun.

    Certainly, they are all possible, and remain possible because, though it has been eight months since we started to put out the fire, we have never bothered to determine what caused the fire.

    We know it manifests as too large a debt load, unpayable. We can’t create money quick enough to make the payments.
    This is a way of saying that the debt-money system has failed, but our solutions are limited to more of the same.

    More debt-money.
    More debt.
    Yadda yadda.

    It’s the money system that needs fixing.

  42. VG Chicago

    Todd Woods: “The new “gold” in America is community. If you are not connected to a community that is some how to the soil, you had better get there.”

    I’ve got a coupla pitchforks made of gold. Does that count?
    Coupla gold 38 special revolvers, too. :)

    Andrew Bissell: “Bernanke swinging from a lamppost”

    May I have that episode on DVD, please? Thank you.

    Vinny GOLDberg

  43. kievite

    Hyperinfation is perfectly possible under stagnant wages high unemployment and diminishing economic output. Ukraine is a good example here.

  44. Richard Kline

    As I’ve mentioned in comments here at NC in the past when the ‘hyperinflation yes/no?’ issue has been raised, I think genuine hyperinflation unlikely, i.e. annual rates in the mid-to upper 100% gain. There is too little space for price pressure. Government authorities are aware of that danger and have many tools to bend things away from that (if tools insufficient to contain inflation generally). We borrow, for now, in our own currency, which removes another driver from a hyperinflationary scenario.

    I have also said, however, and still anticipate sustained _high inflation_ in the mid-teens on an annual basis, perhaps touching the low twenties at times. Probably not yet this year, but an upcurve toward that in the second half of 2010 might would be no surprise. Unemployment is not going to ameliorate, and will stay at sustained high levels for some time. The housing market more nearly resembles the ‘hosing market,’ we aren’t at the bottom either in prices or volume. What this means is that tax receits aren’t going up anytime soon, but rather are going to plunge below anythign we’ve seen. At state and local levels this implies genuine carnage by next year. This also implies that profits at most businesses are going to be far lower than is really being taken into account with forward guidance by those who set and move expectations. (Canny market participants, of course, have other views, but the herd is expecting profits later this year and early next which are unlikely to be there.) All those are drivers that suggests that the Treasury will continue to vomit forth debt which the Fed continues to lick up with the buffers of the electronic printing press. That implies significant inflation, meant in that usage as rising rates for money out on loan and shorter time horizons for said money on loan. As we now see . . . .

  45. Richard Kline

    Four further points here, regarding which I’ve seen too little discussion, but which are, to me, striking. For all the talk about ‘deflation’ we haven’t really seen it yet, in the US. Yes, we have seen asset price declines. Of assets whose prices were at bubble levels. Housing prices _still_ have not recovered to anything which one might call a long-term trend line, expressed for example as a function of incomes. And that’s not even taking into account the substantial _contraction_ of incomes underway in the US (and UK). Equities as of Autumn 2007 were nearing bubble range, supported only by putative profit projections which have turned out to be spurious at best, and vaporous effusions of leverage at worst. Hence price declines in those areas don’t amount to ‘deflation,’ only ‘renormalization,’ and a shift of the latter kind STILL INCOMPLETE. Supposing that employment declines really drive us into an undershoot on asset prices relative to trends, we may begin to talk about deflation. If we had experienced a sustained credit collapse, yes that would certainly have been deflationary too. For the moment, with the Guvmint swearing to make all bets good we are not in credit collapse conditions.

    Contra that postion somewhat though, it’s important not so see ‘inflation’ or ‘deflation’ as absolute states, ones which are either true or false, in effect or absent. They are gradual states, with permeable boundaries. The most deflationary aspect of our present econo-financial space at present is effective zero-bound interest rates, which are real-negative in actuallity, though perhaps no moreso than were the non-zero rates in an environment of massive credit creation of three and four years ago. Those zero-effective rates may be the only thing holding up the mortgage market, but they are also sucking all the oxygen out of the credit markets. And if we do not have a credit collapse, we manifestly have a credit contraction which is deflationary in impact in that the velocity of money slows, and as loans can’t be rolled over they have to be closed out even at a loss, taking more money out of the pool. Given the enormous amount of fictitous leverage in the shadow banking system, it is difficult to say how much credit contraction equals actual deflation. The only conclusion I draw from this is that the bias is deflationary even though the outcome isn’t sharply that way at this time.

  46. Richard Kline

    [One never realizes how confining 5000 characters is until . . . .]

    Similarly, with inflation, it’s not a yes/no proposition. We are going to experience upward pressure on long rates, and an increasing unwillingness of private lenders to take long debt. An inflationary scenario might look like +8% in a healthy economy, but given that we will have a highly unhealthy one for some time we might get the same drivers at a lower nominal level; say 5% is the new 8%. I agree with the commentor above that investors with money to deploy are going to be forced by circumstance into equities, despite the fact that there will be little profit from them in the form of dividends. That motion is purely speculative and defensive, and hence not likely to be either stable or entered into with conviction, but there are not enough hard assets so money is going to move to equities. Looking at historical comparables, we should be expecting serious downtrends yet in equities, and so it will be interesting to observe whether those in fact manifest themselves forcefully and wipe out large sums crowded into equities, or whether the ‘forced call’ of working capital into equities will countervail and at least hold equities neutral. Judging by the movements of the professional investors you have commented on in the past, Ed Harrison—that smart money is holding itself as aloof from equities as it can—countervailing equity purchasing doesn’t seem like the call I would want to get behind myself.

    Finally, regarding a dollar crash, we don’t have to see a scenario of a ‘sudden plunge of x%’ for this to happen. I think we are more likely to see a drift down over multiple quarters, with a final slump to a new but sustainable low. But this isn’t going to happen because ‘Country X’ dumps the buck. NOBODY can dump the buck. The $ is going to drift down because _private capital_ will increasingly charge a premium to lend in it because it’s softening as a currency. Which manifestly it is. Because the financial crisis is general, and revenue and profits are declining in many areas of the globe, there is no way for relevant sovereign actors to exit The Arrangement: all would crash together, and assuredly no one wants to be blamed, far less crushed in the rubble. It will be private capital which progressively deserts the ‘cheap dollar’ by charing more to use it. This will look more like a revaluation than a default, but I suspect it will be the first of several such step-downs given the amount of dollar-denominated debt out there. Every hour we make our debt-to-revenue position more untenable. And that is, well, very _Argentinian_ in an unflattering but apt comparison. It’s important to remember that Argentina wasn’t flattened because other sovereign actors cut it off but rather because private foreign lenders tried to cash out or at least not to roll over: it will be the behavior or large private capital which deterimines the sustainable level of the $. And in that respect, all the pressure will be downward because all the price effect will be inflationary. It may not look like ‘hyper’inflation, but sustained high inflation will be a game changer regardless. The difference in effect is one of timeframe. Sustained high inflation for five years can reach the same place, and drive the currency to the same final level as a short burst of near-hyperinflation or quasi-default. Politically, a gradual writedown of the country is better than a transformative Event, but ten years from now we may not see any difference in the outcome. Sez I.

  47. latent sanity

    a lot of erudite wisdom here …
    not to mention links to more blogs I need to read …
    Let me suggest one scenario that I didn’t find here. I and my cohorts have been considering the “hyperinflation” scenario for some time … see my blog on “Tsunami”.
    The best argument in favor of it is that, if the Fed is determined to bring it about, the man in the street may fuss here and there but generally can be persuaded to accept free money. the best argument against it, as others have made here is, that the very rich are the ones receiving all the handouts and in this culture at this time they have become so pecuniary that nothing, nothing trickles down, and so there simply is no demand.
    What I think is the most likely scenario, and I’ve heard it from others as well, is one that happens not to have any way to invest and make a profit … do recall the second amendment … there are far too many guns in the hands of angry citizens … higher prices of food and gasoliine together with stagnant or decreasing income will not go down easily …I’m expecting the current wave of school shootouts, baby killings, and cop killings, to increase, with a hint of talk about coalescing into revolution, but scant action in that direction; more like a descent into chaos …

    -chistletoe

  48. Edward Harrison

    Sorry for disappearing from this thread but I was watching the football match last night (Barca – ManU)! Let me add a few words to the discussion now, though.

    Justin S was asking what we think of gold. My personal view — and I think Rolfe is onboard with this, Yves may be — is that gold is a nice play in this environment. Christopher Wood, now an analyst at CLSA and formerly the writer of The Bubble Economy, has been saying $3000 was his magic number. That’s a view I share. So you can put me in the Faber camp.

    I should also point out that when the U.S. confiscated gold and devalued the currency in 1933 it was AFTER deflation. So, deflation and gold as a hedge is not an incompatible stance.

    Gold is a much better inflation hedge than TIPS because TIPS use a price index which understates inflation, whereas Gold is going to eventually reflect the market price despite central bank shenanigans.

    Apropos TIPS, I had called Treasurys a bubble late in 2008, but really thought the deflation play was going to last longer and saw the bubble going further. Nevertheless, I advised that TIPS were a much better long treasury play if you wanted exposure. That is looking like a good call at this point because the ten-year and 30-year are getting crushed.

    At some point Bernanke’s going to have to step in here because the Chinese are probably fuming over their paper losses. This might be another reason the dollar had sold off to 1.40 earlier in the week – expectation of more monetization of the U.S. debt.

    For me, the long and short of it is there is no free lunch; the U.S. has overconsumed and the piper must be paid in terms of a lower standard of living in the future. Whether this comes via inflation, asset deflation, dollar depreciation, there is a day of reckoning that is close for the U.S.

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